Overreactions in the Options Market
This paper examines the "term structure" of options' implied volatilities, using data on S&P 100 index options. Because implied volatility is strongly mean reverting, the implied volatility on a longer maturity option should move by less than one percent in response to a one percent move in the implied volatility of a shorter maturity option. Empirically, this elasticity turns out to be larger than suggested by rational expectations theory--long-maturity options tend to "overreact" to changes in the implied volatility of short-maturity options. Copyright 1989 by American Finance Association.
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Volume (Year): 44 (1989)
Issue (Month): 4 (September)
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